Category Archives: startups

Altruisms

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Words for thought. I’m taking a brief respite from serious writing to offer you some of my favorite lines about entrepreneurial thinking.

The true economic stimulus exists in the entrepreneurial spirit.

Customers buy success, entrepreneurs sell benefits.

There is a fine line between perseverance and obstinance. Entrepreneurs need to know when to adapt and change direction.

Tom Hanks once said there is no crying in baseball. Entrepreneurs know that there is no sleeping in startups.

The faster you drive a car that you don’t know how to drive, the more likely you are to crash.

Killing time murders opportunity.

Spreadsheet: a matrix showing how many days of the month you have to eat PB&J sandwiches

Spreadsheet (2) – what startups do before they bed down in their office

Messaround Round: Venture capital obtained by a company that really doesn’t need the money but wants it just to “make sure” of things (& then they promptly spend it on ill-advised items).

Dude Diligence: Investigating the one-owner, one-person business (or dudette diligence, in the feminine).

Small Business Disvelopment Corporation = a very poorly managed SBDC.

Non-intellectual Property (NP) = an invention that’s, let’s face it, not very good.

Entremanure: A client whose business plan stinks

Benchmarks: Sweat left at the gym while avoiding facing issues in your business.

Innervation: Tremors and sweating associated with starting a new company

Fornivator: Someone who screws up your program, as in, “The county commissioners really fornivated us in the new budget.”

An entrepreneur is one that leaves a 9-to-5 job with a steady paycheck, vacation and sick time with limited responsibilities in order to become an owner of a business, working 24 hours a day 7 days a week with uncertain income, no vacation and placing their life savings and family time at risk, all in the name of personal freedom.

A mentor is a person whose hindsight becomes your foresight.

Entrepreneurship is rarely a do it yourself sport.

There is no finish line in entrepreneurship.

Remember that you are unique, just like everyone else.

Learning happens when you have the courage to invalidate your hypothesis.

If you have the data then let’s look at the data. If all we have is opinions, then let’s go with mine.

Instincts are experiments. Data is proof.

Markets that don’t exist don’t care how smart you are.

Finally, wrapping up with a quote from Theodor Geisel,  AKA Dr. Seuss:

“Congratulations!
Today is your day.
You’re off to Great Places!
You’re off and away!

You have brains in your head.
You have feet in your shoes
You can steer yourself
any direction you choose.
You’re on your own. And you know what you know.
And YOU are the guy who’ll decide where to go.”

Garbage In, Garbage Out: The Garbage Can Solutions Model

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The children’s story “Alice in Wonderland clearly identifies the paradigm of the Garbage Can Solution model. When Alice meets the ever-elusive Cheshire Cat they have this conversation:

‘Would you tell me, please, which way I ought to go from here?’

`That depends a good deal on where you want to get to,’ said the Cat.

`I don’t much care where–‘ said Alice.

`Then it doesn’t matter which way you go,’ said the Cat.

`–so long as I get SOMEWHERE,’ Alice added as an explanation.

`Oh, you’re sure to do that,’ said the Cat, `if you only walk long enough.’

The question is if SOMEWHERE is the right place.

“Entrepreneurship is […]a way of thinking that emphasizes opportunities over threats,” according to strategic thinkers such as Krueger, Reilly and Carsrud. The “somewhere” alluded to by Alice can be either threatening or opportunistic for an entrepreneur. It can also be both. The trick is to know the difference.

The “Garbage Can Model” is one tool that is often used by entrepreneurs. The garbage can model is one where all of the entrepreneur’s historical decisions and solutions are thrown into a metaphorical can. When a problem arises, the entrepreneur is able to reach into the can to find a solution to their current problem. We see this often with serial entrepreneurs who look to their past success to solve a different set of problems. This has also been referred to as the sophomore jinx.

Traditionally, the Garbage Can Solution model describes the accidental or random confluence of four streams. A number of academics believe that decision making occurs in a random meeting of: choices looking for problems, problems looking for choices, solutions looking for problems to answer and decision makers looking for something to decide.”

In fact, one well known academic questions the validity of this particular model when she asks, “Does the garbage can model describe actual decision making or is it simply a labeling of the unexplained variance of other, more powerful, descriptions of strategic decision making?”

Additionally, does the garbage can take into account our existing bias based decisions? If we fall back on choices that worked for us in the past, does that mean they will work for us today? Do we need to solely rely on what is currently in our leaders’ bag of tricks to creatively develop new ideas, solutions, or products?

In more establish organizations, famous social scientists Cyert & March tell us that “Exogenous, time dependent arrivals of choice opportunities, problems, solutions and decision makers” are thrown together so that any solution can be associated with any choice. Never a good way to approach decision-making. What they are alluding to is that solutions, problems are often thrown together from previous experience with the hope that the right problem hooks up with the right solution. With unlimited resources and time, this may result in relevant information.

However, is the time-constrained, resource scarce environment of the entrepreneur an appropriate place to utilize this model? This is exactly where entrepreneurs slip. In seeking repeatable processes, creativity is lost. All start-ups should look to the creative solution making process as much as possible.

The answer, as usual, is it depends. Although The Garbage Can Model is not a rational method of strategic thinking, there is significant research backing up this school of thought on decision-making. On first look, this is not a particularly creative approach, nor is it direct and focused on finding specific problems and solutions. By definition the Garbage Can model of decision-making assumes that nothing new is added. The only items in the can are what has already been done or considered. It is history rather than innovation that drives this approach.

However, the creative entrepreneur is not focused on what’s already in the garbage can, but rather what the entrepreneur could be doing to add to the can in order to make rational, novel, and strategic decisions. Unfortunately, for many entrepreneurs, the right solution never gets added to the mix of ideas, problems and solutions.

The best response for entrepreneurs is to find creative answers for their start-ups that are removed as much as possible from prior bias. In order to accomplish this, entrepreneurs must be exploratory and experiential, note boundary limits and consciously develop an environment where all parties involved in the project have a strong, relevant voice. This assures more team buy in to the project. Eliminate power plays and look for the important breaks in typical industry patterns.

So get out of the building, find customer data (however imperfect it may be) and go somewhere. Whether your team decides to dumpster dive or not, I will leave that up to you. However, you should be aware of the upside and limitations for utilizing this business model in your start-up.

Convertible Notes or Price Valuation: A Question of Risk and Alignment of Interests

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I am not a fan of convertible notes for entrepreneurs for a number of strategic issues. I also understand the reasons why convertible notes have become so popular with entrepreneurs and investors because of the simplicity of the closing. I believe series seed equity can close just as quickly and inexpensively as convertible notes.

For the uninitiated, convertible notes are debt instruments with an implied interest rate, maturity date and a convertible option to shares usually offered with a discount offered to the next pricing round. The intended purpose for investors is to avoid negotiating a valuation with the entrepreneur that might affect the follow- on round negotiated with the next group of investors. For entrepreneurs, convertible debt offers a faster option to close, and ergo cash in hand.

On the other hand, priced rounds offer each investor a price per share. Because of negotiation over valuation they can take longer to develop.

One of my favorite posts on why convertible notes are unfavorable to startups comes from Mark Suster. He offers significant details on the terms of the note and why they are not a good idea for entrepreneurs.

In addition to what Mark has written in detail, my take on this is much more strategic and focused on the alignment of interests between investors and entrepreneurs. First, by placing a maturity date on the convertible note, the entrepreneurs must strategically change their focus from company building to fundraising. Often the maturity date for the convertible note is set for approximately 18 months away. A better date for the entrepreneur would be 24 months, although sometimes they are set as low as 12 months, which is disastrous for the entrepreneur. Given the hunt for funds from new investors, due diligence and the negotiation of valuation—all of this activity can take time away from building and running a company.

The pro convertible funds side of the equation believes that that the time involved on a convertible round is much faster and settles quicker, ergo the whole purpose of a convertible note. My belief is that the function of the convertible note should not be necessary if the interests of the investor and the entrepreneur are strategically aligned.

In early stage companies, the best way to build a startup is through customer development and acquisition. What would an early stage investor prefer? Using their money toward the next fundraising round or focus on customer building? This leads to be an inherent conflict in strategy between the entrepreneur and investor on a convertible round. There is a specific imbedded date to obtain new funds. If that funding is not achieved by that date, the funds become a debt—and entrepreneurs sometimes need a longer runway to launch their companies.

The second issue regarding convertible notes revolves around the purpose of Angel investing. First or second sources of funding after the first formal funding round means to accept the significant risk involved with early stage technology financing. Angels understand that investing at this stage is inherently risky, and the reward is a significant uptick in pricing on subsequent rounds. Convertible notes are an attempt to hedge the risk by not pricing the financing round. Are the protections from down rounds or failures truly built into a note? Yes, a note may be higher in the pecking order of a fire sale in case of a failure. However, if a startup fails, what are the assets truly worth? If the round is not priced, the value cannot be determined easily.

What happens if the entrepreneur does not achieve the steps needed to get the next round of funding? The original Angel has a choice, put in a second round or let the company go broke. However, if the entrepreneur has been able to find another investor, the golden rule applies: “He who has the gold, rules.” The investor leading the next round may decide to offer to fund with the original note holders waiving a number of their protective rights.

Pricing a round allows the Angel to see the negotiating techniques of a founder and the founder to see how helpful an Angel is to the startup. They can begin to see whether their interests are truly aligned. Are both negotiating with the same sense of fairness and aligned interests? Why not have that difficult conversation about pricing, now? It shows the mettle of your CEO. It determines Angel alignment with company goals. If a valuation can’t be agreed upon fairly quickly then perhaps the deal should not have been done at all. Fred Wilson of Union Square Ventures said it well, “Equity is simple and you own what you own.”

As an investor, I attempt to understand the upside risk and prefer a clear valuation. After all, this is my risk capital portfolio. I want my entrepreneur to focus on building the company by creating a sound customer base, so that the next round is a growth round, not another marketing round.

The Champions of the World

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Early in my career, I worked for a commercial bank. Most of the new Lending Officers hated the dreadful Wednesday morning Credit Committee meeting. There, the Officers presented client requests to the members of the Credit Committee, which consisted of the President, the senior risk officer, and a few other top lending officers, and hoped they were approved. But hope is not a plan.

The seasoned Lending Officers had a plan that was usually successful for their clients in these dreaded meetings. They understood risk and the likely questions that the committee members would ask at the meeting—and they always had an appropriate plan. Due to the limits of time during their presentation some item or characterization would be bypassed. They included anticipated questions in the lending documents. There may have been a request for additional collateral, a higher interest rate, shorter tenor or term or personal guarantees. The seasoned Lending Officers almost always had the client approval before the committee meeting and these additional requests were in their “back pocket.” As a result, when the conditional approval went through, the Lending Officer often had all the required additional documentation before the credit committee members returned to their office.

How were these lending officers so successful? Yes, in part due to experience. Mostly, it was that the loans were pre-sold (not in the mortgage way) to the credit committee members before entering the meeting. The deal was pre-shopped, and championed by one or two credit committee members. Walking in, the lending officers knew approval was in hand.

Entrepreneurs going to Angels also need to find their champion and pre-shop their deals. They need to find someone on the inside who will be the evangelist for the deal. Entrepreneurs need to get past the Angel’s investment committee. This is usually the investors’ spouse.  The pitch by the entrepreneur must be clearly articulated to ensure investors clearly understand the value proposition and can articulate how the investor can get investor committee approval.

If an entrepreneur can articulate their value proposition and demonstrate that their team is the best to execute on the new venture. Then go—and pre-sell the deal. The entrepreneur will appear confident, clear and worthy of investment of the Angel’s time and money.

The Last Mile

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Fitness experts and athletes know that when they are lifting weights, the number of sets and repetitions within each set vary according to weight. On normal days their weightlifting tends to be three sets of 10 to 15 repetitions. Good athletes understand that the first eight of ten or thirteen of fifteen reps do not make the muscle grow. It is always the last two or three reps that causes the growth. They put all of that work up front, just for the last few reps.

If you have ever pumped a bicycle tire then you understand that after during the first ten pumps, the tire still looks flat, like nothing has changed. The same is true for the athlete. Work too hard in the gym and their muscles react and feel fatigued. That reaction is called over training. Over pump a tire and it explodes.

The same is true with entrepreneurs. It takes a significant amount of work upfront to understand customers, markets, and value chains in order to ultimately lead to a business model. Validating and testing customers as well as building prototypes is just preparation to get to the starting line. What about that last lift to finish? That’s just one more repetition to get to a first sale. And it is that last “rep” that is the hardest.

The same is true in all sports: Running a yard short of goal doesn’t make a touchdown, hitting the goalpost doesn’t score a goal, landing a golf ball an inch from the cup doesn’t matter at all. Nothing matters until a score is made.

Sports are games of inches, preparation, and work, and so is a startup. Entrepreneurs need all that preparation in order to travel that last inch and beyond.

The Entrepreneur as Magician

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We want our startups to act convincingly with passion and a compelling vision for their invention or process. We want them to suspend our disbelief and stunningly convey the magic of their innovation. A magical story is the single best way a startup can acquire the talent required to build a successful company.

Passionate people join startups when magic is invoked. Good people want to work in great environments with great leaders who bring their magic to that business. This type of magic is an honest and creative vision of the innovation with a vision about how it can change the world.

Magicians tell stories during their performances. For both the magician and entrepreneur, story telling is about engagement. Magicians need a story to set up the trick; entrepreneurs use the story to bring relationships and talent onboard.

Sometimes, a magician undersells and overstates the difficulty of the trick. Similarly, entrepreneurs may under promise and over deliver. Entrepreneurs are very good storytellers. They tell stories about products that define a path to the future, a problem solved, and a job accomplished, or increased efficiency. These stories paint an exciting picture of the future and these stories are what it takes to make early sales possible.

Entrepreneurs use good story telling setups. They map the benefits of the product back to customer needs and mesmerize future customer while doing so. If you think about it, stories are much more memorable than statistics. Everyone remembers a good story or compelling image. Do any of you remember a statistic from a commercial for a product or service? I don’t.

Magicians use small props to divert attention away from the real magic. Similarly, startup entrepreneurs effectively use limited resources to magically pull a rabbit out of a hat. They know that if they can’t pull off that trick, there is always a plan B.

As Elmer Fudd will tell you, wabbits can be very, very rascally and… tricky. The startup environment is tricky as well. Entrepreneurs need to learn to navigate its puzzling waters, pivot when necessary, and be ready to take advantage of new opportunities. Ready to execute on plan B.

Magicians use their talented assistants wisely. Magicians’ assistants make their boss look good. Startup entrepreneurs must also employ their assistants in order to efficiently build the business. Warning to both magicians and entrepreneurs: Never cut your assistant in half. Make the work fun and don’t overwork your assistants.

Magicians engage the audience during each of their tricks. They often invite an audience member onstage to participate. Good entrepreneurs engage their target audience – customers—early in the product development cycle as well as the sales and marketing process. Engaging customers’ interest is the single best goal for startups. Early involvement in the process helps prospects listen and buy.

Last of all, magicians and entrepreneurs both develop a special rapport with their audience or customers and receive appreciation. They also show their appreciation as well. When entrepreneurs show customers how special they are, the customers will return for more.

Remember that as a startup entrepreneur, your job is to show the passion and convey the magic of your innovation.